Greasing the skids for a bear move in oil.
You thought I was kidding you when I said oil was targeting the $85.00 per barrel area. Nope, not really. We got a lot closer to that pretty quick as old worries and fears came back and gripped the market. Despite all the talk about a third quarter tightening of supply, current weaker than expected economic data and the mess in Europe makes one wonder why we believed the Greece crisis was solved in the first place. Fear was on display as the VIX rose and the oil market plunged and the dollar soared as traders sought safe harbor from the confusion that is Greece.
Oil traders should have known it was going to be a tough day when the Empire State Manufacturing Index just screamed dismal. The Federal Reserve Bank of New York's general economic index plunged to minus 7.8 hitting the lowest level since November. New orders decreased to minus 3.6 in June from 17.2 the month before.
If the data is weak then perhaps we will get a QE-3 and that should surely improve the price of oil. Well don't count on it as inflation is rising. How transitory will inflation be as rising food and energy prices are sinking into the core rate and into the national psyche. The consumer price index increased 0.2 percent which was double what was expected and the core rate which excludes food and energy jumped 0.3 percent which was the biggest jump since July, 2008. A rising inflation rate will hog tie the Fed and if the trend continues we will have to slog through weak growth without that extra shot of Federal Reserve caffeine.
Riots in Greece which reminded traders of the "flash crash" and a crashing impression of what euro oil demand expectations might be and the lack of a credit rating in Greece. Fears of contagion will put the market at bay until traders figure out how Greece will restructure and solve their debt problems. Instead of a deal to provide rescue funds to save the country, talks broke down and broke confidence in the euro. The Greek riots may take away the will of the Greek government to make the cuts that will be necessary to get outside help. Greek Prime Minister George Papandreou's friends are abandoning him and the turmoil is created more downward pressure on commodities.
Bloomberg News reported, "Greek Prime Minister George Papandreou's decision to reshuffle his Cabinet and demand his allies vote confidence in his government fueled dissent within his Socialist ranks and roiled financial markets. The yield on Greece's 2-year bond topped 30 percent for the first time on concerns Papandreou's grip on power was slipping, threatening passage of a new austerity plan aimed at securing a second aid package and avoiding the euro-region's first default. The resignation today of two members of Papandreou's parliamentary group, prompted Socialists lawmakers to demand an emergency meeting with the premier. The political turmoil came as European Union talks on forging a new bailout to prevent the first euro-area default stalled. The impasse over the aid formula and speculation that a government shakeup would disrupt passage of budget cuts and asset sales sent Greek bonds and the euro plunging. EU's Economic and Monetary Affairs Commissioner Olli Rehn said in an interview that Greece would receive its next bailout payment. Papandreou sought to reassert his authority in a televised address last night hours after police used tear gas to break up protests in central Athens and media reported he was in talks to step down in favor of a unity government. He said he would reshuffle his Cabinet and then call a confidence vote in parliament. He has yet to announce the details of the government shakeup."